CenterPoint Energy, Inc.
Q1 2011 Earnings Call Transcript

Published: 5 May 2011

[Operator:]

Good morning, and welcome to CenterPoint Energy's First Quarter 2011 Earnings Conference Call with senior management. [Operator Instructions] I will now turn the call over to Marianne Paulsen, Director of Investor Relations. Ms. Paulsen?

[Marianne Paulsen:]

Thank you very much, Thea. Good morning, everyone. This is Marianne Paulsen, Director of Investor Relations for CenterPoint Energy. I'd like to welcome you to our first quarter 2011 earnings conference call. Thank you for joining us today. David McClanahan, President and CEO; and Gary Whitlock, Executive Vice President and Chief Financial Officer, will discuss our first quarter 2011 results and will also provide highlights of the key activities. In addition to Mr. McClanahan and Mr. Whitlock, we have other members of management with us who may assist in answering questions following their prepared remarks. Our earnings press release and Form 10-Q filed earlier today are posted on our website, which is www.centerpointenergy.com, under the Investors Section. I would like to remind you that any projections or forward-looking statements made during this call are subject to the cautionary statements on forward-looking information in the company's filings with the SEC. Before Mr. McClanahan begins, I would like to mention that a replay of this call will be available until 6

[David McClanahan:]

Thank you, Marianne. Good morning, ladies and gentlemen. Thank you for joining us today and thank you for your interest in CenterPoint Energy. This morning, I will talk about a significant development that occurred during the first quarter, then describe our first quarter financial results and provide the operating results for each of our business segments. Let me begin with the discussion of our true-up appeal. As most of you probably know, the 1999 law, which restructured the electric industry in Texas, allowed electric utilities to recover stranded costs and certain other transition expenses in what is known as a "true-up proceeding." In 2005, the Texas PUC issued a decision that failed to allow us to recover some of the costs to which we believe we were entitled. As a result, we took a $947 million after-tax extraordinary loss, and appealed the PUC decision. The appeal was heard in the district court, followed by the Court of Appeals and finally the Texas Supreme Court. On March 18, the Supreme Court issued its decision in our true-up appeal. The court reversed the PUC on a number of points and remanded the case back to the commission for implementation. As a result of the decision of the Supreme Court and of the earlier decision by the Court of Appeals, we will be able to seek in the remand proceeding recovery of the following

[Gary Whitlock:]

Thank you, David, and good morning to everyone. Today I would like to discuss the accounting treatment and cash flow impacts of the Supreme Court's decision in our true-up case, recent credit rating agency actions, and our earnings guidance. As David mentioned in his remarks, on the basis of the Supreme Court's March 18 decision, we plan to seek to recover approximately $1.85 billion through the sale of non-recourse securitization bonds. The $1.85 billion includes interest through September 30, certain costs associated with the sale of our generation assets, and an adjustment associated with the benefit of deferred taxes. This entire amount will be subject to federal and state income taxes at a rate of approximately 36%. Although we will receive the cash when the securitization bonds are issued, these taxes will be paid over the life of the bonds as we collect this amount from customers. As you know, we cannot be certain when the Supreme Court will dispose of the motions for rehearing, or when the PUC will issue its order on remand and the necessary financing order. However, for purposes of this discussion, I have assumed that $1.85 billion of bonds are issued on September 30. If the bonds are issued later than September 30, interest will continue to accrue at approximately 8%. Let me explain how the $1.85 billion would be recorded. Assuming a 36% tax rate, we expect to recognize just under $1.2 billion in after-tax earnings. This amount will be recognized in 2 different time frames. Once the decision is finalized, the company would immediately recognize after-tax earnings of approximately $830 million to reflect the recovery of additional stranded costs and transition expenses, plus the debt component of the interest amount, offset by the benefit of deferred taxes. The equity component of the interest amount, which we estimate to be approximately $365 million after taxes, would not be recognized upfront, but will be recognized over the life of the securitization bonds. Regarding the use of the proceeds from the sale of the securitization bonds, our fundamental objectives have not changed. We will continue to seek opportunities to invest in accretive projects and to strengthen the balance sheet. Depending upon the timing and availability of these opportunities, we may also consider a modest stock buyback. Now let me address 2 recent positive credit rating developments. Following the Texas Supreme Court's decision in our true-up case, Moody's placed under review for possible upgrade the ratings of CenterPoint Energy and our subsidiaries CE and CERC. Moody's said that during the course of this review over the next few months, it will assess the financial impact from the Supreme Court ruling, including our plans for the securitization proceeds. Last month, S&P announced that it has affirmed CenterPoint's corporate credit rating at BBB, but also revised the ratings outlook on CenterPoint Energy, CE and CERC to positive from stable. In the release accompanying the announcement, S&P said that the rating action results from improvements in CenterPoint's business and financial risk profile that may support a higher rating, and reflects S&P's expectations that CenterPoint will prudently utilize the proceeds expected to result from the Texas Supreme Court's decision in the true-up case. Finally, let me discuss our earnings guidance. We were pleased with our overall business performance in the first quarter, and this morning, we reaffirmed our 2011 earnings guidance in the range of $1.04 to $1.14 per diluted share. This guidance does not include the earnings impact of the Texas Supreme Court's decision in our true-up case which I described earlier. In providing earnings guidance, we have taken into consideration our year-to-date performance, as well as various economic, operational and regulatory assumptions. As the year progresses, we will keep you updated on our earnings expectations. Now, I'd like to turn the call back to Marianne.

[Marianne Paulsen:]

Thank you, Gary. And with that, we will now open the call to questions. In the interest of time, I would ask you to please limit yourself to one question and a follow-up. Thea, would you please give the instructions on how to ask a question?

[Operator:]

[Operator Instructions] The first question will come from Carl Kirst with BMO Capital.

[Carl Kirst:]

Gary, can I just ask a clarifying question here? So the accounting aside, and I appreciate that color, you're saying that we're going to be paying out the income taxes on the new securitized bonds over the life of those bonds? That means we're actually going to be getting something close to $1.85 billion -- I mean, if it all went well, we'll be getting $1.85 billion of cash on hand and then we'll just see, like a $20 million to $25 million bleed out per year? Is that how we should think of it?

[Gary Whitlock:]

Yes, I would think of it when -- the first part of that is correct. We will sell securitization bonds, in this example, $1.85 billion that we would receive. The tax then will be paid out at approximately 36%, and you can think about that when you see the term of those bonds. So in an assumption that you have 14-year bonds, you would pay the income tax over the 14 years as you collect the money from the customers.

[Carl Kirst:]

Okay, appreciate that. And just on a related question, and understanding you guys don't necessarily know the minds of the PUC, but do you get the sense that they are working in parallel with respect to the TSC [Texas Supreme Court], i.e. that they're working on the remand order as we speak, or is this something where it's going to be very, very linear and we have to have the Supreme Court either issue their ruling or wait 180 days before the PUC will even start working on this?

[David McClanahan:]

Scott, why don't you address that.

[Scott Rozzell:]

Carl, my expectation is that the commission has reviewed the Supreme Court's order as it exists so far. We'll review the motions for rehearing that people have filed, including the PUC itself, that they will do some preliminary work to understand how that process will play out, potentially looking at prior financing orders and the models that we used to plug in the inputs from the Supreme Court's ultimate decision, so that we will be in a position to move fairly quickly after the Supreme Court rules on the motions for rehearings. But in terms of taking any formal steps, I think the PUC will wait until after the Supreme Court has disposed of the motions for rehearing.

[Carl Kirst:]

Understood. That's very helpful. And then lastly, if I could, just any investment update, if you will, as far as the status of either the Eagle Ford or the Haynesville -- and with the Haynesville, I'm not necessarily talking about the Encana shale, but there at one point was sort of the intimation that maybe some other types of facilities, support facilities, water, et cetera, might be out there. I didn't know if you could touch on either of those.

[David McClanahan:]

I'll get Greg to answer that for you, Carl.

[C. Harper:]

We continue to work on several items in the Haynesville relative to our contracts with Shell and Encana, and those are -- would evolve around water systems or other services as well. Nothing to report at this point in time. We continue to exchange proposals, and it's really up to our customers to dictate the time frame there, but we feel pretty good that we'll -- eventually something's going to happen. At Eagle Ford, we continue to press forward on opportunities in Eagle Ford. One of our largest customers had a request for proposals come out and we've responded to that, and we'll continue to respond to those.

[Operator:]

[Operator Instructions] The next question will come from Ali Agha with SunTrust.

[Ali Agha:]

Gary, also I want to comment on a related question. In terms of how you're going to recognize the earnings from this decision, it appears to me that the $830 million that you would recognize upfront, was an obligation [ph] recognized as a one-time item gain. The $365 million that gets recognized over the life of the bonds, would you consider that as ongoing earnings, or would you look at that separate from your, when you're talking about ongoing earnings with us?

[Gary Whitlock:]

No, I would look at that as ongoing earnings.

[Ali Agha:]

Okay. Second question. With regards to the use of proceeds, as you mentioned, investments and potentially a modest share buyback, should we assume that discussions with regards to setting up an MLP are no longer on your radar screen, or is that still under consideration?

[Gary Whitlock:]

I think certainly from a funding perspective, we're looking at that different because we certainly are looking at a significant amount of cash. I think the MLP though, perhaps has other benefits, and I think our position really remains the same. One, our guys are working diligently as you heard from Greg to originate new business in our midstream areas, so to the extent we got significant projects. We would look at an MLP because we'd think about the very long term, when's the best financing vehicle for the very long term. And so we're here to run this company for the longer term, not the near term. So I think an MLP certainly is not off the radar screen. I just think that the events that would be the catalyst for it really need to be significant projects in our midstream business. It's really not necessarily a near-term funding issue. And of course, there's been the qualitative aspects that you have to look at is the valuation for the total company in terms of some of the parts. We certainly continue to look at that with that structure being helpful in that regard, but I would not say it's off the radar screen. I think our screen though that we've put it through is a bit different now with the significant funding that we have coming from the securitization bonds.

[Ali Agha:]

Right. And last question, to clarify, what is share buyback -- when you think along those lines, you're thinking in the $50 million, $100 million range or how would you define modest?

[Gary Whitlock:]

Well, I'm really not prepared this morning to put a number on that. I think "modest" speaks for itself, and certainly we would not use the majority of these funds for a share buyback. What we're going to -- let me step back from that. What we want to do, of course, is invest these dollars in accretive projects. That's job number one. And our guys are continuing to work hard to find those very good opportunities. So that's job number one. To the extent, as I've mentioned, the timing of that is different, then we'll look at paying down debt, and we look at a share buyback as well. So don't try to pin me down on a number, but it would be modest because our goal really is to invest in this business. And that's best for our shareholders over the long term and it's best for our credits over the long term is to have really high-quality, accretive investments.

[Operator:]

The next question will come from Steve Gambuzza with Longbow Capital.

[Steven Gambuzza:]

Question for you on the numbers you put out regarding the volumes on Magnolia and Olympia, you said 550 on Magnolia and 350 on Olympia, is that correct?

[David McClanahan:]

300 on Olympia. 550 combined.

[Steven Gambuzza:]

Okay. And is that -- just so I have this right. The Magnolia is about 900 capacity and the Olympia Phase I -- I'm sorry, the Magnolia and the Magnolia I expansion are, together, 900 of capacity and Olympia Phase I is 600 of capacity?

[David McClanahan:]

That's correct.

[Steven Gambuzza:]

Okay. So you're roughly running kind of 55% or so capacity utilization in the first quarter and you'd expect to be running full when you exit 2011, is that right?

[David McClanahan:]

By 2012 -- early 2012 is when we expect to ramp up to the contracted quantities, yes.

[Steven Gambuzza:]

Okay. And so, should we expect -- I mean we look at the operating profit that Field Services put out this quarter, would you expect kind of consistent sequential increases as we go through the year as the system continues to ramp up?

[David McClanahan:]

Well, I think we hope to see some fairly consistent improvements in profitability. The wildcard here, Steve, is our traditional basins, and they have flattened out some last year, they declined a little bit more in the first quarter of this year. But we had some unusual weather, we had, wellhead freeze offs and stuff like that, so we have to kind of look at it again in the second quarter. But I think we should see continued profitability from these investments we've made in Shell and Encana. And as we said, the Fayetteville, especially in southern Woodford, those volumes are picking up, too, more than offsetting the decline we're seeing in the traditional basins.

[Steven Gambuzza:]

Great. And then just finally, it seems like O&M expense found a level versus last quarter after a couple of significant increases over the past couple of quarters. Is this a pretty good run rate to use for Field Services O&M expense going forward?

[David McClanahan:]

It's getting close to that. Most of the facilities are now in service and we have been putting new facility in service over the last 12 months, so once they're all in service, especially the AMI [ph] facilities, I think we'll have a good run rate. We're getting very close to that, I would think.

[Operator:]

The next question will come from Debra Bromberg with Jefferies & Company.

[Debra Bromberg:]

I was just wondering if I could get clarity on something. The $365 million that you referred to earlier, was that the equity return?

[David McClanahan:]

Yes.

[Gary Whitlock:]

Yes, yes.

[Debra Bromberg:]

And are you securitizing that up front?

[Gary Whitlock:]

Yes, the entire $1.85 billion will be securitized.

[Debra Bromberg:]

Right, but the securitization proceeds, that includes both the debt and equity return?

[Gary Whitlock:]

That includes the total amount, right, in that example I gave.

[Debra Bromberg:]

And the $365 million that you're recognizing over the life of the bonds, is that non-cash?

[Gary Whitlock:]

That would be non-cash, that's correct. Deferred taxes will be set up on all of this, and that would be non-cash, that's correct.

[Debra Bromberg:]

And one other question. Have you said what the deferred tax liability is?

[Gary Whitlock:]

Not specifically. We've estimated it at $1.85 [billion]...

[David McClanahan:]

About $600 million and that'll be kind of ratcheted off over the life of the securitization bond.

[Gary Whitlock:]

[indiscernible] Present value...

[Gary Whitlock:]

I'm sorry, Debbie -- Debra, what was your question again? I missed it.

[Andrew Smith:]

The deferred tax liability, is that around $600 million?

[Gary Whitlock:]

Yes, that's correct.

[Debra Bromberg:]

Is that the present value?

[David McClanahan:]

No, no. That's just -- you set up that deferred tax when you set up the accounting for the proceeds, and you pay those -- are you referring to the deferred taxes that reduced the amount that we recovered through securitization?

[Debra Bromberg:]

Yes.

[David McClanahan:]

Yes. That's not that big, it's about $125 million or so that reduced the amount, essentially reduced the amount of interest we get to recover.

[Operator:]

[Operator Instructions] The next question will come from Yves Siegel with Crédit Suisse.

[Yves Siegel:]

I have 2 questions. Number one, could you describe the investment opportunity in the Eagle Ford in terms of the RFP that you received? And the second question is, could you describe how you view the acquisition landscape across the different businesses?

[David McClanahan:]

Greg, do you want to comment on that? This is a confidential kind of RFP and we can't provide very much color other than it's primarily directed at gas gathering and the liquids associated with that.

[C. Harper:]

That's exactly right, David, it is under FCA [ph] right now, [indiscernible] but part of it is right in our [indiscernible], it's traditional gathering, and then the other part would be some higher pressure, can take away price, both gas and liquids.

[Yves Siegel:]

And you wouldn't be looking at processing then?

[C. Harper:]

Possibly.

[David McClanahan:]

And in terms of just the landscape of acquisitions, there's lots of activity going on in the electric space these days. A lot of that is not necessarily driven by pure regulated considerations, and of course, we look at things from a regulated standpoint. So I think there's more activity there now, so if that means anything, I guess only time will tell. Certainly on the midstream businesses, there's been activity there. They're fairly pricey as we see them. We would much rather be investing in organic growth as opposed to paying a high multiple, but we continue to look at those opportunities and I think there'll be some opportunities over time.

[Yves Siegel:]

If I could just follow-up real quick. When we think about the Eagle Ford and your strategic advantage there, is it more so because of the customer connection as opposed to any synergies with existing assets?

[David McClanahan:]

Yes, I think that's right. I mean we obviously know the business well, but it is customer relationship. We do not have any assets today in the Eagle Ford. I would say definitely the relationship is very important.

[C. Harper:]

Also I think just on our core business of gathering, I don't think there is a strategic advantage anybody would have over us just because they have existing facilities. And when you're talking about well connects and taking them to control points. So I think we're on an equal playing field on that type of relationship as well.

[Yves Siegel:]

Last question, I promise. Just on the re-contracting, what's the situation there?

[David McClanahan:]

With the backhaul?

[Yves Siegel:]

Yes.

[David McClanahan:]

We're making some progress on trying to get some dollars or some capacity re-contracted. I think we'll have some success there this year. We probably will not get the full $500 million a day re-contracted, and certainly what we do get re-contracted will be at a lower rate than we're being paid today. We still estimate, I think we said this last time, about a $20 million annual impact this year from the loss of that backhaul. That's including our estimate for offsetting with some re-contracting amounts.

[Operator:]

At this time, there are no further questions. I will turn the conference back over to Ms. Paulsen for any closing remarks.

[Marianne Paulsen:]

Thank you again, Thea. Since we do not have any further questions, we would like to end the call. Thank you very much for participating today, and we appreciate your support very much. Have a great day.

[Operator:]

This concludes CenterPoint Energy's First Quarter 2011 Earnings Conference Call. Thank you for your participation.